* Section refers to the area controlled by the Republic of Cyprus unless otherwise specified.

PEOPLE AND HISTORYGreek and Turkish Cypriots share many customs but maintain distinct identities based on religion, language, and close ties with their respective "motherlands." Greek is predominantly spoken in the south, Turkish in the north. English is widely used. Cyprus has a well-developed system of primary and secondary education. The majority of Cypriots earn their higher education at Greek, Turkish, British, and other European or American universities. Both the Turkish and Greek communities have developed private colleges and state-supported universities.

Cypriot culture is among the oldest in the Mediterranean. By 3700 BC, the island was well inhabited, a crossroads between East and West. The island fell successively under Assyrian, Egyptian, Persian, Greek, and Roman domination. For 800 years, beginning in 364 AD, Cyprus was ruled by Byzantium. After brief possession by King Richard I (the Lion-Hearted) of England during the Crusades, the island came under Frankish control in the late 12th century. It was ceded to the Venetian Republic in 1489 and conquered by the Ottoman Turks in 1571. The Ottomans applied the millet system to Cyprus, which allowed religious authorities to govern their own non-Muslim minorities. This system reinforced the position of the Orthodox Church and the cohesion of the ethnic Greek population. Most of the Turks who settled on the island during the 3 centuries of Ottoman rule remained when control of Cyprus--although not sovereignty--was ceded to Great Britain in 1878. Many left for Turkey during the 1920s, however. The island was annexed formally by the United Kingdom in 1914 at the outbreak of World War I and became a crown colony in 1925.

Cyprus gained its independence from the United Kingdom and established a constitutional republic in 1960, after an anti-British campaign by the Greek Cypriot EOKA (National Organization of Cypriot Fighters), a guerrilla group that desired political union, or enosis, with Greece. Archbishop Makarios, a charismatic religious and political leader, was elected president.

Shortly after the founding of the republic, serious differences arose between the two communities about the implementation and interpretation of the constitution. The Greek Cypriots argued that the complex mechanisms introduced to protect Turkish Cypriot interests were obstacles to efficient government. In November 1963, President Makarios advanced a series of constitutional amendments designed to eliminate some of these special provisions. The Turkish Cypriots opposed such changes. The confrontation prompted widespread intercommunal fighting in December 1963, after which Turkish Cypriots ceased to participate in the government. Following the outbreak of intercommunal violence, many Turkish Cypriots (and some Greek Cypriots) living in mixed villages began to move into enclaved villages or elsewhere. UN peacekeepers were deployed on the island in 1964. Following another outbreak of intercommunal violence in 1967-68, a Turkish Cypriot provisional administration was formed.

In July 1974, the military junta in Athens sponsored a coup led by extremist Greek Cypriots against the government of President Makarios, citing his alleged pro-communist leanings and his perceived abandonment of enosis. Turkey, citing the 1960 Treaty of Guarantee, intervened militarily to protect Turkish Cypriots.

In a two-stage offensive, Turkish troops took control of 38% of the island. Almost all Greek Cypriots fled south while almost all Turkish Cypriots fled north. Since the events of 1974, UN peacekeeping forces have maintained a buffer zone between the two sides. Except for occasional demonstrations or infrequent incidents between soldiers in the buffer zone, the island was free of violent conflict from 1974 until August 1996, when violent clashes led to the death of two demonstrators and escalated tension. The situation has been quiet since 1996.

GOVERNMENTSince 1974, Cyprus has been divided de facto into the government-controlled two-thirds of the island and the Turkish Cypriot one-third. The Government of the Republic of Cyprus has continued as the internationally recognized authority; in practice, its authority extends only to the government-controlled areas.

The 1960 Cypriot Constitution provided for a presidential system of government with independent executive, legislative, and judicial branches, as well as a complex system of checks and balances, including a weighted power-sharing ratio designed to protect the interests of the Turkish Cypriots. The executive, for example, was headed by a Greek Cypriot president and a Turkish Cypriot vice president, elected by their respective communities for 5-year terms, and each possessing a right of veto over certain types of legislation and executive decisions.

Following the 1974 hostilities, the Turkish Cypriots in north Cyprus set up their own institutions with an elected president and a prime minister responsible to the National Assembly exercising joint executive powers. In 1983, the Turkish Cypriots declared an independent Turkish Republic of Northern Cyprus ("TRNC"). Only Turkey recognizes the "TRNC".

POLITICAL CONDITIONSIn February 2003, Greek Cypriots elected Tassos Papadopoulos, leader of the center right Democratic Party, as president of the Republic of Cyprus. President Papadopoulos was supported by a broad coalition of parties ranging from his own Democratic Party to communist AKEL. None of the Greek Cypriot parties has been able to elect a president by itself or dominate the 56-seat House of Representatives. The 165,000 Greek Cypriot refugees from north Cyprus are a potent political force, along with the independent Orthodox Church of Cyprus, which has some influence in temporal as well as ecclesiastical matters.

"TRNC President" Rauf Denktash won re-election in 2000 to a 5-year term of office. Turkish Cypriot "parliamentary" elections were held on December 14, 2003. Because the question of whether Turkish Cypriots desired a settlement on the basis of UN Secretary-General Annan's peace plan in time to join the EU on May 1, 2004 alongside Greek Cypriots was central to the elections, the elections received considerable international attention. Two pro-solution parties -- Mehmet Ali Talat's Republican Turkish Party (CTP), and Mustafa Akinci's Peace and Democracy Movement (BDH), evenly split the 50 seats in the "TRNC" "assembly", 25-25, with two conservative parties -- the National Unity Party (UBP), and the Democrat Party (DP), led by "Deputy Prime Minister" Serdar Denktash -- which together captured over 45% of the vote. CTP leader Talat formed a coalition "government" with the DP. Talat was named "Prime Minister" while Serdar Denktash became both "Deputy Prime Minister" and "Foreign Minister."

In the spring of 2004, three "MPs" left Talat's coalition, breaking the CTP-DP's parliamentary majority. Unable to form a majority "government" Talat resigned and early elections were held on February 20, 2005. Talat's party consolidated its position in these elections, single-handedly winning over 44% of the vote. With 24 seats in the legislature, CTP renewed its coalition agreement with the 6-seat DP on March 9, 2005. "Prime Minister" Talat simultaneously declared his candidacy for April 17 elections to replace "President" Rauf Denktash, who has announced his retirement. CTP and DP have agreed to reconstitute their "government" under a new CTP "Prime Minister" should Talat succeed in replacing Rauf Denktash.

The first UN-sponsored negotiations to develop institutional arrangements acceptable to both communities began in 1968; several sets of negotiations and other initiatives followed. Turkish Cypriots focus on bizonality, security guarantees, and political equality between the two communities. Greek Cypriots emphasize the rights of movement, property, settlement, and the return of territory. Turkish Cypriots favor a loose grouping of two nearly autonomous societies living side by side with limited contact. Greek Cypriots envision a more integrated structure.

Direct talks began in January 2002 between the Greek and Turkish Cypriot community leaders under the auspices of the UN Secretary General, Mr. Kofi Annan.

In November 2002, Secretary General Annan released a comprehensive plan for the resolution of the Cyprus issue. This plan was revised in early December. In the lead up to the December 2002 EU Copenhagen Summit, intensive efforts were made to gain both sides' signatures to the document prior to a decision on the island's EU membership. Neither side agreed to sign. The EU invited the Republic of Cyprus to join on December 16.

Following the Copenhagen Summit, the UN continued dialogue with the two sides with the goal of reaching a settlement prior to Cyprus's signature of the EU accession treaty on April 16, 2003. A third version of the Annan plan was put to the parties in February 2003. That same month the Secretary General again visited the island and asked that both leaders agree to put the plan to referendum in their respective communities. Also in February 2003, Tassos Papadopoulos was elected as the fifth president of the Republic of Cyprus. On March 10, 2003, this most recent phase of talks collapsed in The Hague when Mr. Denktash told the Secretary General he would not put the Annan plan to referendum.

On April 23, 2003, Mr. Denktash relaxed many restrictions on individuals crossing between the two communities, including abolishing all crossing fees. Since then, the relaxed crossing procedures have led to relatively unimpeded bicommunal contact for the first time since 1974. Between April 2003 and April 2004, there were over 3,000,000 buffer zone crossings in both directions. Greek Cypriots are currently required to present their passports at the checkpoints along the buffer zone, something many are reluctant to do. Greek Cypriots are permitted to drive their personal vehicles in the Turkish Cypriot community, provided they first obtain a policy from an insurance provider in the north. Turkish Cypriots are permitted to cross into the government-controlled area upon presentation of a Turkish Cypriot ID card. Turkish Cypriots must also obtain car insurance from an insurer in the south to drive their personal vehicles in the government-controlled area. Individuals with Turkish citizenship and all third country nationals are not permitted to enter the government-controlled area from north Cyprus. Third country nationals in the Republic of Cyprus are permitted to cross into north Cyprus upon presentation of their passports at the checkpoints along the buffer zone.

In February 2004, President Papadopoulos and Mr. Denktash accepted the Secretary General's invitation to resume negotiations on a settlement on the basis of the Annan plan. After a meeting with the Secretary General in New York, talks began in Cyprus on February 19. The two community leaders met nearly every day for negotiations facilitated by the Secretary General's Special Representative for Cyprus, Mr. Alvaro De Soto. In addition, numerous technical committees and subcommittees met in parallel in an effort to resolve outstanding issues and complete the legislative framework. Beginning on March 24, the talks moved to Burgenstock, Switzerland with the participation of the Prime Ministers and Foreign Ministers of Greece and Turkey. Negotiations concluded on March 31, and the Secretary General presented the two sides with a final settlement package.

Most Turkish Cypriot and Turkish leaders supported the agreement, but most Greek Cypriot leaders, including President Papadopoulos, urged the Greek Cypriot public to reject the settlement. On April 24, after a three-week campaign marked by accusations that the government of Cyprus was unfairly manipulating public opinion, Cypriots on both sides of the Green Line went to the polls in parallel and simultaneous referenda. Turkish Cypriots voted by a large majority (65% "yes" to 35% "no") to accept the solution. Greek Cypriots, however, voted by an even larger margin (76% "no" to 24% "yes") to reject it.

Cyprus entered the European Union on May 1, 2004 as a divided island. The Secretary General's Good Offices Mission is suspended.

Principal Government OfficialsPresident of the Republic--Tassos PapadopoulosForeign Minister--George IacovouMinister of Finance--Iacovos KeravnosMinister of Commerce, Industry, and Tourism--Yiorgos LillikasMinister of Communications and Works--Haris ThrasouMinister of Justice and Public Order--Doros TheodorouAmbassador to the United States--Euripides L. EvriviadesPermanent Representative to the United Nations--Andreas Mavroyiannis

Cyprus maintains an embassy in the United States at 2211 R Street NW, Washington, DC 20008 (tel. 202-462-5772) and a Consulate General in New York City. Cyprus also maintains a trade center at 13 East 40th Street, New York, NY 10016 (tel. 212-686-6016). Turkish Cypriots maintain offices in Washington (tel. 202-887-6198) and at the Republic of Turkey's Mission to the United Nations.

ECONOMY*Cyprus has an open, free-market, serviced-based economy with some light manufacturing. Cyprus's accession as a full member to the European Union as of May 1, 2004, has been an important milestone in the course of its economic development. The Cypriots are among the most prosperous people in the Mediterranean region. Internationally, Cyprus promotes its geographical location as a "bridge" between West and East, along with its educated English-speaking population, moderate local costs, good airline connections, and telecommunications.

In the past 20 years, the economy has shifted from agriculture to light manufacturing and services. The service sector, including tourism, contributes 75.7% to the GDP and employs 70.7% of the labor force. Industry and construction contribute 19.7% and employ 21.3% of labor. Manufactured goods account for approximately 63.6% of domestic exports. Agriculture and mining is responsible for 4.6% of GDP and 8.0% of the labor force. Potatoes and citrus are the principal export crops.

The average rate of growth in the 1990s was 4.4%, compared with 6.1% in the 1980s. In the last two years (2002 and 2003), annual economic growth dropped to 2.0%, compared with 4.0% in 2001 and 5.1% in 2000. In 2003, unemployment accelerated to 3.5% of GDP, from 3.2% the year before. Inflation also recorded an increase to 4.1% from 2.8% in 2002. As in recent years, the services sectors, and tourism in particular, provided the main impetus for growth. Economic activity in manufacturing and agriculture remained about the same in 2003.

Trade is vital to the Cypriot economy: the island is not self-sufficient in food, and has few natural resources. The trade deficit decreased by 9.2% in 2003 (on account of a considerable reduction in imports), reaching $3.0 billion.

Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 50% of its trade is with the European Union, particularly with the United Kingdom.

Growth in 2004 is expected to accelerate to 3.5%, due to a revival in tourism. Unemployment is expected to remain around 3.6% in 2004, while inflation is forecast to drop considerably to 2.5%. The fiscal deficit is forecast to decline to 4.4% of GDP in 2004, compared with 5.4% in 2003, remaining above Maastricht targets.

Investment ClimateAs of October 1, 2004, the Government of Cyprus (GOC) has lifted restrictions on foreign direct investment from non-EU countries in order to attract more foreign direct investment and promote Cyprus as an international business center.

The GOC's earlier decision to lift incoming direct investment restrictions for EU residents as of January 2000 boosted foreign investment from the EU, which jumped from $225.2 million in 1999 to $374.7 million in 2000. The inflow of foreign direct investment from all countries reached $1.0 billion in 2003, 58.1% of which came from the EU.

Cyprus has bilateral agreements for the encouragement and reciprocal protection of investments with the following 15 countries: Armenia, Belgium, Bulgaria, Belarus, China, Egypt, Greece, Hungary, India, Israel, Lebanon, Poland, Romania, and the Seychelles. Another 40 bilateral investment agreements are currently under negotiation. Cyprus does not have a bilateral investment protection agreement with the United States. Cyprus also has entered into bilateral double tax treaties with 40 countries, including one with the United States. The main purpose of these treaties is the avoidance of double taxation of income earned in any of these countries. Under these agreements, a credit is usually provided for tax levied by the country in which the taxpayer resides for taxes levied in the other treaty country. The effect of these arrangements is normally that the taxpayer pays no more than the higher of the two rates.

International Business CenterCyprus has good business and financial services, modern telecommunications, an educated labor force, good airline connections, a sound legal system, and a low crime rate. Cyprus's geographic location, tax incentives and modern infrastructure also make it a natural hub for companies looking to do business with the Middle East, Eastern Europe, the former Soviet Union, and North Africa. As a result, Cyprus has developed into an important regional center for many International Business Companies (IBCs) conducting their offshore affairs from the island.

In July 2002, the House passed tax reform legislation abolishing tax discrimination afforded to offshore companies by the end of 2005, in line with Cyprus's commitments to the EU and OECD. Under the new regime, corporate tax on profits for IBCs has been set at 10.0% -- the same as for local companies. IBCs registered before 2002 were given the option of continuing to pay the preferential rate of 4.25% for a transitional period ending in 2005. They were also given the option of expanding their operations to include Cyprus, as well.

European Union (EU) Along with the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia, the Republic of Cyprus entered the EU on May 1, 2004. The EU's acquis communautaire is suspended in north Cyprus pending a settlement of the island's division.

Export OpportunitiesOn January 1, 1996, Cyprus began full implementation of the Uruguay Round agreement. Under this agreement, the Government of Cyprus eliminated quantitative restrictions and other non-tariff barriers to trade, allowing improved access to the Cypriot market. Cyprus is a full member of the World Trade Organization.

Additionally, completion of the EU-Cyprus Customs Union agreement on May 1, 2004 liberalized the island's trade regime further, allowing all goods to be traded between Cyprus and the EU with a zero tariff rate. Under the same agreement, Cyprus has adopted fully the EU's Common Customs Tariff (CCT) for products from third (non-EU) countries.

The best prospects for U.S. firms generally lie in services, high technology sectors, such as computer equipment and data processing services, financial services, environmental protection technology, medical and telecommunications equipment, and tourism development projects. Moreover, alternative energy sources and the energy sector in general are attracting an increasing amount of attention, while the possible existence of natural gas and petroleum reserves off the southern and eastern coast of Cyprus opens up new prospects. Finally, the island's private sector has a growing appetite for U.S.-made office machines, computer software and data processing equipment, while U.S. food franchises and apparel licensors have found fertile ground for expansion in Cyprus in recent years.

Trade Between Cyprus and the United StatesThe U.S. Embassy in Nicosia sponsors a popular pavilion for American products at the annual Cyprus International State Fair and organizes other events to promote U.S. products throughout the year. Total U.S. exports to Cyprus declined to $185.7 million in 2003, from $202.8 million in 2002. Principal U.S. exports to Cyprus include office machines and data processing equipment, electrical equipment, tobacco and cigarettes, passenger cars, and wheat. Principal U.S. imports from Cyprus consist of Portland cement, clothing, hunting rifle cartridges, canvas, dairy products, and fresh fish.

Turkish Cypriot EconomyThe economic disparity between the two communities is pronounced. Although the Turkish Cypriot area operates on a free-market basis, the lack of private and governmental investment, high freight costs, shortages of skilled labor, plus inflation and previous devaluations of the Turkish lira--which the Turkish Cypriots widely use as their currency--continue to plague the economy. Nevertheless, the north has experienced a recent economic boom due to an increase in tourism and construction, the expansion of its universities -- which cater mostly to students from Turkey -- and the employment of several thousand Turkish Cypriots in the south.

Since the April 23, 2003 relaxation of restrictions on travel across the buffer zone, there have been more than 4 million crossings. Greek Cypriot spending in the north provided a short-term boost to the Turkish Cypriot economy. This initial influx has tapered off, however, as both the number of trips per month and the average spending per trip by Greek Cypriots has declined. Travel by Turkish Cypriots to the south continues, and Turkish Cypriot businesses are increasingly concerned that they are losing both skilled labor and sales. Many Turkish Cypriots are choosing to work in the south where wages are significantly higher. Many Turkish Cypriots are also choosing to purchase certain products in the south.

Despite initial expectations, the relaxation of travel restrictions has not yet resulted in measurable commercial trade between the two communities, largely due to trade barriers resulting from the continued division of the island. Trade between the two communities remains very modest, despite the introduction on August 23, 2004 of a new European Commission sponsored "Green Line" regulation permitting the sale of certain items produced in the north in the rest of Cyprus. While this regulation also permits items from the north to be exported to the rest of the EU through ports in the south, no such exports have yet occurred.

Turkey is, by far, the main trading partner of north Cyprus, supplying 62.1% of imports and absorbing 41.6% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on July 5, 1994 against the British practice of importing produce from north Cyprus based on certificates of origin and phytosanitary certificates granted by "TRNC" authorities. The ECJ decision stated that only goods bearing certificates of origin from the Government of Cyprus could be recognized for trade by EU member countries. The ECJ decision resulted in a considerable decrease of Turkish Cypriot exports to the EU--from $36.4 million (or 66.7% of total Turkish Cypriot exports) in 1993 to $13.8 million in 2003 (or 28% of total exports). Even so, the EU continues to be north Cyprus's second-largest trading partner, with a 25% share of total imports and 28% share of total exports. Additionally, the economic crisis in Turkey has had a negative impact on north Cyprus foreign trade in the last 2 years. Total imports increased to $415.2 million in 2003 (from $309.6 million in 2002), while total exports increased to $49.3 million (from $45.4 million in 2002).

Assistance from Turkey is the mainstay of the Turkish Cypriot economy. Under the latest economic protocol (signed January 2001), Turkey undertakes to provide Turkish Cypriots loans and financial assistance totaling $350 million for the purpose of implementing projects included in the protocol related to public finance, tourism, banking, and privatization. Turkey also has agreed to provide a supplementary amount of $140 million to entrepreneurs in the form of low-interest loans with the purpose of supporting export-oriented industrial production and tourism. Fluctuation in the Turkish lira continues to exert downward pressure on the Turkish Cypriot standard of living.

* Section refers to the area controlled by the Republic of Cyprus unless otherwise specified.

FOREIGN RELATIONSThe Government of Cyprus aligns itself with European positions within the EU's Common Foreign and Security Policy. Cyprus has long identified with the West in its cultural affinities and trade patterns, and maintains close relations with Greece. Since 1974, the foreign policy of the Government of Cyprus has sought the withdrawal of Turkish forces and the most favorable constitutional and territorial settlement possible. This campaign has been pursued primarily through international forums such as the United Nations. (See Political Conditions.) Turkey does not recognize the Government of Cyprus.

The Government of Cyprus enjoys close relations with Greece. Cyprus is expanding relations with Russia, Israel, Egypt, and Syria, from which it purchases most of its oil. Cyprus is a member of the United Nations and most of its agencies, as well as the World Trade Organization, the World Bank, International Monetary Fund, Council of Europe and the British Commonwealth. In addition, the country has signed the Multilateral Investment Guarantee Agency Agreement (MIGA).

U.S.-CYPRUS RELATIONSThe United States regards the status quo on Cyprus as unacceptable. Successive administrations have viewed UN-led inter-communal negotiations as the best means to achieve a fair and permanent settlement, but after the failure of the Greek Cypriots to approve the comprehensive settlement plan in April 2004, the path to a settlement is unclear.

The United States is working closely with Cyprus in the war on terrorism. A Mutual Legal Assistance Treaty, which has been in force since September 18, 2002, facilitates bilateral cooperation.

The United States has channeled $305 million in assistance to the two communities through bi-communal projects, the UN Office of Project Services, the UN High Commissioner for Refugees, and the Cyprus Red Cross since the mid-1970s. The United States now provides approximately $13.5 million annually to promote bi-communal projects and finance U.S. scholarships for Greek and Turkish Cypriots.